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Strategies for Minimizing Your Tax Burden
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Choosing the Right Business Entity
Choosing the Right Retirement Plan
How to Qualify for the Home Sale Gain Exclusion
Explains the ownership and use tests you must meet to exclude up to $500,000 of gain on the sale of your home.
How to Save for College Tax-Free
529 plans allow your savings to grow tax-deferred, with distributions to pay for a beneficiary's college costs coming out federally tax-free. While these plans have some potential drawbacks, they can make sense for parents who have money left over after funding their retirement accounts. Also see this site's overview on Education Savings Accounts.
The Basics of Health Savings Accounts
These plans allow you to pay for medical expenses with pre-tax dollars. Contributions to the plan are tax deductible up to $2,700 per year for individual plans and $5,450 for family coverage (for 2006). The money in the account grows and can be distributed tax-free if used for medical expenses. You must be covered by a high-deductible health plan in order to become eligible.
Maximizing Your Itemized Deductions
Checklist and overview to make sure you have everything covered. This site has a good list as well. For a list of adjustments to income (above-the-line deductions) such as moving expenses, self-employed health insurance, student loan interest, etc., click here.
Do You Qualify for any Individual Tax Credits?
A credit is generally better than a deduction because it provides a dollar-for-dollar reduction in your tax liability. This site gives you an overview of the foreign tax credit, credit for child care expenses, education credits, child tax credit, and a host of others. Click on the name of each credit to see the overview covering how much credit can be claimed, who qualifies, what the requirements are, etc.
The top marginal income tax rate in California is 9.3% (10.3% if you count the supplemental tax on incomes over $1 million). The top marginal rate in Nevada is 0%. Las Vegas is about a 5-hour drive from Los Angeles, which makes a lot of Californians wonder "what if?". This article gives an overview of the tests that must be met to claim Nevada residency and avoid California tax.
Miscellaneous Tax Saving Strategies for Individuals
Covers five often overlooked tips and tricks.
Tax Prep Checklist for Individuals
Helpful list of information you will need to gather to prepare your individual tax return. Also check out this free tax organizer you can use to identify all your income and deductions. Providing this to your tax accountant should help reduce your tax preparation fees significantly.
10 Ways to Lower Your Property Tax Bill
Property tax assessments are incorrect more often than you might think.
Should You Prepare Your Own Tax Return?
Objective advice on the benefits and drawbacks. Also covers the differences between Enrolled Agents, CPA's and tax attorneys, plus how to choose the right one.
Donor Advised Funds vs. Private Foundations
Both donor advised funds and private foundations allow you to take a charitable tax deduction currently by contributing to the fund, and then decide later to which charities to give the money. Unless you are in it for ego and control, contributing to charity through a donor advised fund is typically the better option.
Understanding Taxation of Equity Compensation
A basic overview of stock and option compensation for employees.
If you understand this topic you can save yourself a lot of unnecessary accounting fees. Usually the easiest thing to do is just pay in 100% of last year's tax (110% if your prior year adjusted gross income was over $150,000) unless your income will be substantially less this year.
The Ultimate Tax Shelter: Your Own Business
As far as deductions go, the tax code is stacked against employees. If you want to maximize your deductions, figure out a way to be in business for yourself. By doing so you can potentially convert otherwise personal expenses such as auto, home office, meals, travel, supplies, computer equipment, etc. into allowable tax deductions.
Deductions Your Small Business Shouldn't Overlook
Useful list of easily missed deductions with plain-English explanations.
Claiming the Home Office Deduction
How to write off a portion of your rent, utilities, repairs, insurance, depreciation and other home-related expenses.
Overview of what qualifies plus what records to keep. If you can establish a home office deduction, you can significantly increase your vehicle tax write-off since more of your miles will be considered deductible business miles rather than nondeductible commuting.
Should You Buy or Lease Your Business Auto?
With non-business autos (for which you generally can't take a tax deduction), it usually makes more financial sense to buy than lease. The analysis becomes much more complicated for business autos after factoring in taxes. Check out this chart for some general rules of thumb on when to buy vs. lease a business auto.
How establishing a business purpose may allow you to deduct certain otherwise personal travel and vacation expenses. See here for a list of what expenses are potentially deductible when you travel.
Deducting Meals & Entertainment
Overview of what is allowed and what records you should keep. In general only 50% of your meals & entertainment expenses are deductible, however there are certain exceptions where you can deduct 100% of the cost.
Does Your Business Qualify for any Tax Credits?
This site provides an overview of the various federal tax credits available for businesses. The most common credits for small businesses are probably the Research & Development Credit, Work Opportunity and Welfare-to-Work Credits, Tips Credit, Fuel Tax Credit, and Retirement Plan Start-Up Credit.
Miscellaneous Tax Saving Strategies for Small Business
Nice summary of some miscellaneous strategies you can use to cut down the tax bill on your small business. However, you will probably be better off using a Solo 401(k) plan rather than than a SIMPLE IRA as this article suggests.
Independent Contractor vs. Employee
Nice overview of the basics on worker classification. If you treat a worker as an independent contractor it is always safest to have the worker incorporate in order to avoid the requirement to issue the worker a 1099. Form 1099 is what typically raises a red-flag with the IRS on this issue.
How Employee Stock Options and Related Equity Incentives Work
Covers the basics of incentive stock options, non-qualified options, and employee stock purchase plans. Also check out this site's overview on phantom stock plans, restricted stock, and other issues related to equity compensation.
Cash vs. Accrual: What's the Difference?
Explains the differences between the cash and accrual methods of accounting. If your accounts receivable and prepaid expenses are typically higher than your accounts payable and accrued expenses, you will generally want to choose the cash method for tax purposes, assuming you are eligible for it.
How electing the Last-In-First-Out (LIFO) method for inventory accounting can increase cash flow for your business.
Which Form of Entity Should You Choose?
Unfortunately there is no one-size-fits-all solution. The best form depends on your unique circumstances including what type of business you are in, what other income you have, and how many owners there are. Here are 20 questions to help you make the right choice.
The default choice for an entity is generally an LLC, unless (1) You are in a business that requires a license and are prohibited by state law from operating as an LLC, (2) You run a small business with few owners giving you an opportunity to reduce self-employment tax by using an S-corporation instead, (3) You operate in California and would be subject to the California Gross Receipts Fee for LLC's with gross receipts over $250,000, or (4) You have large annual medical expenses not covered by health insurance, in which case a C-Corporation can be more beneficial in limited circumstances. As a general rule, never hold real estate in a corporation; form an LLC or LP instead.
How to Reduce Self-Employment Tax by Using an S-Corporation
As a sole proprietor or LLC member, all of your income from an operating business is typically subject to self-employment tax at 15.3% on the first $94,200 (for 2006) of income. Forming an S-corporation can significantly reduce this tax bite for certain small businesses.
S-Corporation vs. C-Corporation
Unless you have substantial annual medical expenses not covered by health insurance (which can be deducted by a C-Corporation under a medical reimbursement plan but are not deductible by an S-corporation), an S-corporation is usually (but not always) the better choice for small businesses.
If you own real estate in California and will be subject to the California Gross Receipts Fee on LLC's with annual receipts over $250,000, a limited partnership with an 1% LLC or S-corporation general partner may be a better option.
Debunking the Nevada Incorporation Myth
Businesses that operate in states other than Nevada must still register to do business and pay tax in the resident state, thereby negating any tax or legal benefit to forming the entity in Nevada. If you are a California resident, usually all Nevada incorporation will do is subject you unnecessarily to a second set of state fees.
Choosing the Right Retirement Plan
Retirement Plan Overview for Small Business
Comparison chart showing the basic differences between SEP, SIMPLE, Self-Employed 401(k) and Regular 401(k) plans. See here for a slightly more technical explanation of each type of plan.
Solo 401(k) Plan vs. SEP: Which is Better?
Explains how a Solo 401(k) (a.k.a. Self-Employed 401(k)) plan generally allows you to defer far more income than a SEP plan.
If you are relatively young and/or content with tax-deferred retirement contributions of up to $44,000 annually (for 2006), stick with a SEP or 401(k) plan. If you are within 10 years of retirement, have a consistently profitable business with few employees, and want to sock away even more, consider a defined benefit plan. Also see here for a brief overview of 412(i) defined benefit plans. If you are the only person in your business, check out a solo defined benefit plan.
Basic overview of the tax rules on how much you can contribute, withdrawals, etc. For the basics of traditional IRA's, click here. To find out whether a Roth or traditional IRA is better for you, click here. To find out whether it makes sense to convert your existing traditional IRA to a Roth IRA, click here.
The Trouble With IRA's, 401(k)'s and Other Retirement Plans
You are trusting the government not to change the rules when it gets into a fiscal crunch. Perhaps it won't, but have a backup to your qualified retirement plan just in case. Diversify your savings between retirement and non-retirement accounts.
Pros and Cons of implementing an Employee Stock Ownership Plan (ESOP) for your corporation.
Holding Nontraditional Assets in Your IRA
It is possible to hold real estate in an IRA, but since real estate is such a tax-advantaged investment, holding it in a retirement account usually doesn't make sense. Additionally, the overwhelming majority of IRA custodians won't allow direct real estate investment. Still, if you want to pursue real estate or other nontraditional investments in an IRA and need to find an IRA custodian, click here or here.
Top Myths About Retirement Plans
Common misconceptions about choosing beneficiaries, when you can take your money out, etc.
How to Reduce the Chances of an Audit
Practical list to which I would add: 1) Be sure to include all income reported by third party payers (1099's, W-2's, etc.) as the IRS knows about it anyways, and 2) Instead of filing Schedule C, incorporate your business or form a partnership so you can report your income on Schedule E, which has much lower audit exposure. This site has a pretty good list as well, although their theory on extensions is an often debated one among CPA's.
Less than .2% of individual returns were subject to face-to-face audits in fiscal year 2004.
IRS Enforcement Trends Over Time
Overview showing the decline in business audit rates, decrease in IRS staff by position, and increased use of correspondence rather than face-to-face audits over time.
Common Items Auditors Look for on Business Returns
Deducting personal expenses (travel, meals, entertainment, auto, etc.), revenue underreporting, payroll tax compliance, and independent contractor vs. employee.
Audit-Proofing Your Tax Return
Covers some basic recordkeeping techniques you should follow to avoid trouble in the event of an audit.
Using CRT's to Avoid Capital Gains Tax
Strange as it sounds, you may actually be able to make more money after tax from your appreciated investments by giving them away. Brief overview of charitable remainder trusts.
Hedging Strategies for Appreciated Securities
How to lock in the majority of your gain on appreciated securities without recognizing taxable gain. This is a technical article, but it covers some useful strategies including short sales, put options, and collars.
How to Convert Capital Losses into Interest Expense
Overall capital losses are limited to $3,000 per year. Here is a way to get around the limitation in certain cases and receive a current deduction for your accumulated investment losses.
Miscellaneous Tips for Tax-Wise Investing
See tip #1 for a method to qualify a portion of your short-term trades for long-term capital gains treatment.
Taking the Worthless Stock Deduction
Scroll about half way down the page on this one.
Nice summary of the tax advantages and the requirements to defer recognizing gain on the sale of real estate held for investment.
Avoiding the Passive Loss Limitations
Unless you are actively participating and/or are a real estate professional, the loss on your rental property may not be fully deductible. This site walks you step by step through the tests you have to meet to claim the real estate professional exception and currently deduct all your losses.
How to take faster depreciation deductions on rental real estate. Each $100,000 of assets reclassified from a 39-year recovery period to a 5-year recovery period results in approximately $16,000 in net present value savings, assuming a 5% discount rate and a 35% marginal tax rate. This technique can also work with real estate acquired in a 1031 exchange.
Quick Reference Income Tax Rate Tables
Rates that apply to each income tax bracket plus other important thresholds and limitations.
List of important tax deadlines to keep in mind.
See the tax calculator section of this site to figure out how much tax you will owe, how many withholding exemptions you should claim, etc.
Overview of all the greatest hits plus why they don't work.
Brief history of how we got into this mess.
Why does a slight tax increase cost you $2,000 and a substantial tax cut saves you $30?
The Curse of the Withholding Tax
Did you have to write out a check to the IRS for $5,581 on April 15th?
War, Taxes, and What People Voluntarily Will Pay For
Americans generously give over $250 billion to charity but volunteer only $600 in response to the president's plea for cash to support the occupation of Iraq.
The $3 Federal Election Box on Your Tax Return
Only about 10% of people check "yes". I like the author's suggestion: "Check here if you would rather just keep your money."